The Office of General Counsel issued the following opinion on June 17,
2004, representing the position of the New York State Insurance Department.

Re: The making of debt cancellation contracts and debt suspension agreements by
financial institutions

Question Presented

Is the making in New York of debt cancellation contracts or debt
suspension agreements by a New York State or non-New York depository institution or a
Federal or New York state chartered credit union, in connection with extensions of credit
to customers of such entity, subject to regulation under the New York Insurance Law?

Conclusion

The making of debt cancellation contracts or debt suspension agreements
by a New York State or a non-New York depository institution or a Federal or New York
State chartered credit union, in connection with extensions of credit to customers of such
entity, constitutes the doing of an insurance business in New York. However, the
Department has determined that it will not regulate debt cancellation contracts or debt
suspension agreements sold by such entities in accordance with this opinion.

Facts

The Department has received several inquiries of a general nature
regarding the making of debt cancellation contracts and debt suspension agreements in New
York by different types of
financial institutions.

Analysis

Definition of DCC and DSA

A debt cancellation contract ("DCC") or a debt suspension
agreement ("DSA") is an agreement between a lender and a borrower, usually for a
fee, which is typically separate from and in addition to interest or other charges, under
which the lender agrees to either cancel or suspend for a specified period of time the
borrowers obligation incurred under the debt instrument upon the happening of a
specified event.1 A specified event may include death, disability, or
involuntary employment of the borrower or other event that may reasonably be expected to
affect the ability of the borrower to repay the loan.

The question of DCCs and DSAs made by a financial institution is
actually two-fold: 1. Does the financial institution have the authority to make DCCs and
DSAs under its enabling legislation; and 2. Assuming that the financial institution has
such authority, is it nonetheless subject to Insurance Law licensing and compliance
requirements. The first question is most appropriate for the financial institutions
chartering authority or primary regulator to answer. The second question is within the
province of the insurance regulator. In this response, the Department does not endeavor to
answer the first question but relies upon the determinations of the regulators of such
financial institutions as to their authority to enter into these agreements.

Doing of an insurance business

As stated in an Office of General Counsel opinion dated April 2, 2002,
it is the Departments position that a DCC or a DSA constitutes an insurance contract
under N.Y. Ins. Law § 1101(a)(1) (McKinney 2000), which provides:

"Insurance contract" means any agreement or other transaction
whereby one party, the "insurer" is obligated to confer benefit of pecuniary
value upon another party, the "insured" or "beneficiary", dependent
upon the happening of a fortuitous event in which the insured or beneficiary has, or is
expected to have at the time of such happening, a material interest which will be
adversely affected by the happening of such event.

In 1964, the Attorney General of New York opined that a DCC is an
insurance contract. In considering the question of a national bank entering into a DCC
with a borrower providing for the cancellation of the debt in the event of the
borrowers death, the Attorney General wrote: "In my opinion a debt cancellation
contract of the kind in question is an insurance contract and the banks status
thereunder is that of an insurer." The Attorney General concluded that a national
bank entering into a DCC in New York must comply with the licensing and other relevant
provisions of the Insurance Law. 1964 Op. Atty. Gen. 30. This opinion applies equally to a
DSA, which differs materially from a DCC only in that the obligation is merely suspended
not cancelled. This Departments opinions have been consistent with the Attorney
Generals ruling. A more extensive discussion of the Departments position may
be found in earlier opinions of this Office. Under the Insurance Law, the maker of the DCC
or DSA would have to become licensed as an insurer pursuant to N.Y. Ins. Law § 1102
(McKinney 2000), unless it was otherwise exempted from licensing requirements.

Gramm Leach-Bliley and national banks

Enactment of the Gramm-Leach-Bliley Act (Pub. No. 106-102, 113 Stat.
1338, 1999) ("GLBA") affirmed a national banks ability to underwrite, as a
principal, DCCs and DSAs. GLBA § 302 (15 U.S.C. § 6712 (2000)) delineates the limits on
a national banks ability to underwrite insurance. GLBA § 302(c)(1) (15 U.S.C.
§ 6712(c)(1) (2000)) defines insurance for the purposes of GLBA § 302 in part as
"any product regulated as insurance as of January 1, 1999, in accordance with the
relevant State insurance law, in the State in which the product is provided."
Pursuant to GLBA § 302(a) (15 U.S.C. § 6712(a)(2000)), a national bank and its
subsidiaries may not provide insurance in a State as a principal, unless it is an
authorized product.

GLBA § 302(b) (15 U.S.C. § 6712(b) (2000)) defines a product as
authorized if, as of January 1, 1999, the OCC had determined in writing that national
banks may provide such a product as principal, or national banks were in fact lawfully
providing such product as principal, and no court of relevant jurisdiction had, by final
judgment, overturned a determination of the OCC that national banks may provide such a
product as a principal and the product is not title insurance, or an annuity contract the
income of which is subject to tax treatment under § 72 of the Internal Revenue Code of
1986.

In 1963, the OCC, by interpretive letter, concluded that offering DCCs
was properly incidental to the express authority of a national bank to make loans, and was
therefore a permissible activity pursuant to 12 U. S. C. § 24 (Seventh) (2000). The
substance of the 1963 interpretation was promulgated by the OCC as a regulation in 1971.
In 1998, in response to an inquiry by a national bank concerning DSAs, the OCC affirmed
its view that national banks may underwrite DSAs as part of the banks expressly
authorized lending function. OCC Interpretive Letter # 827, April 3, 1998.

In 2002, the OCC adopted its current regulation 12 CFR Part 37. 12 CFR
37.1 provides:

(a) A national bank is authorized to enter into debt cancellation
contracts and debt suspension agreements and charge a fee therefor, in connection with
extensions of credit that it makes, pursuant to 12 U.S.C. 24.

* * *

(c) Scope. This part applies to debt cancellation contracts and debt
suspension agreements entered into by national banks in connection with extensions of
credit they make. National banks' debt cancellation contracts and debt suspension
agreements are governed by this part and applicable Federal law and regulations, and not
by part 14 of this chapter or by State law.

Accordingly, national banks are permitted to underwrite both DCCs and
DSAs because they are authorized products under Section 302 of the GLBA.

GLBA § 104(a) recognizes the role of the states as functional
regulators of insurance. 15 U.S.C. § 6701(a) (2000). This role is also reaffirmed in the
GLBAs explicit recognition of the continuing role of the states as the primary
regulator of insurers in the financial holding company. 12 U.S.C. § 1844(c)(4)(B)
(2000). New York Insurance Law sets forth a comprehensive statutory and regulatory scheme
governing the underwriting and sale of insurance in New York State. As insurance products
under New York law, DCCs and DSAs are subject to this regulatory scheme.

GLBA §§ 104(d)(1) and (e)(3) (15 U.S.C. § 6701(d)(1) and (e)(3)
(2000), however, set forth general limits that would affect the state regulation of
insurance underwriting by a depository institution. A depository institution is defined in
GLBA §§ 104(g)(3) (15 U.S.C. § 6701(g)(3)) to have the same meaning as that given
in section 3 of the Federal Deposit Insurance Act and also includes a foreign bank that
maintains a branch, agency or commercial lending company in the United States. Section 3
of the Federal Deposit Insurance Act definition is codified as 12 U.S.C. 1813(c)(1) to
mean "any bank or savings association", which terms are further defined in
subsections (a) and (b) respectively.2 Depository institution includes a
national bank.

GLBA § 104(d)(1) provides in part:

" no State may, by statute, regulation, order,
interpretation, or other action, prevent or restrict a depository institution or an
affiliate thereof from engaging directly or indirectly in any activity authorized
or permitted under this Act and the amendments made by this Act."

GLBA § 104(e)(3) provides in part:

"Except as provided in any restrictions described in subsection
(d)(2)(B), no State may, by statute, regulation, order, interpretation, or other action
regulate the insurance activities authorized or permitted under this act or any other
provision of Federal law of a depository institution or an affiliate thereof, to the
extent that such statute, regulation, order, interpretation, or other action 

* * *

(3) effectively prevents a depository institution, or an affiliate
thereof, from engaging in insurance activities authorized or permitted by this Act or
another provision of Federal law; "

As the Insurance Department stated in an April 2, 2002 opinion, the
application of existing laws and regulations relating to the underwriting of insurance to
a national bank underwriting DCCs or DSAs issued by the national bank would prevent or
restrict a national bank from carrying out such activity. However, the Department further
states that the application of existing laws and regulations, relating to the sale of
insurance, to a national bank engaged in the sale of DCCs or DSAs issued by the national
bank may or may not violate the proscription "prevent or significantly
interfere" set forth in GLBA § 104(d)(2)(A). Accordingly, the Department stated
that such a determination would need to be made on a case-by-case basis.

As noted, subsequent to issuance of the April 2, 2002 opinion, the
Office of the Comptroller of the Currency issued a final regulation, 12 C.F.R. Part 37; 67
Fed. Reg. 58976 et seq. (Sept. 19, 2002), governing the issuance of debt cancellation
contracts and debt suspension agreements by national banks. Subpart 37.1(c) states that
"National banks debt cancellation contracts and debt suspension agreements are
governed by this part and applicable Federal law and regulations, and not by part 14 of
this chapter or by State law."

In light of the OCC regulation, the Insurance Department determined in
an April 4, 2003 opinion that it will not regulate the sale of debt cancellation contracts
or debt suspension agreements sold by a national bank in connection with an extension of
credit to a customer of the bank.

Federal credit unions

A Federal credit union (FCU) issues share drafts; it does not take
deposits and is not a depository institution within the meaning of GLBA. Thus, the above
analysis regarding GLBA does not apply to a FCU.

FCUs are regulated by the National Credit Union Administration (NCUA).
On Sept. 12, 1997, the NCUA issued Legal Opinion Letter No. 97-0632. In the letter,
the NCUA relied on First National Bank of Eastern Arkansas v. Taylor, 907 F.2d 775,
780 (8th Cir. 1990), cert. denied, 498 U.S. 972 (1990), for the proposition that,
since national banks are permitted to offer debt cancellation contracts under their
incidental powers, debt cancellation contracts should not be considered to be the
"business of insurance." The NCUA concluded that a debt cancellation contract or
gap waiver is not insurance and that a FCU may issue such agreements so long as the FCU
does not act as a "self-insurer", by retaining the risk. If the FCU instead
purchased insurance (for example, gap insurance) to cover the entire risk of loss,
the NCUA opined, the FCU may enter into a debt cancellation contract or gap waiver under
its own incidental powers.

Subsequently, the NCUA promulgated regulations, effective September
5, 2001. (Credit Union Incidental Powers, 66 Fed. Reg. 40,845 (Aug. 6, 2001),
codified at 12 CFR Part 721). Section 721.3 lists the categories of activities that are
preapproved as incidental powers necessary or requisite to enable the FCU to carry on its
business. As specified in § 721.3(g), one of those categories includes:

(g) loan related products. Loan-related products are the products,
activities or services you [the FCU] provide to your members in a lending transaction that
protect you against credit-related risks or are otherwise incidental to your lending
authority. These products or activities may include debt cancellation agreements, debt
suspension agreements, letters of credit and leases.

The FCUA has primary regulatory authority over FCUs, including
supervising financial solvency. When adopting 12 CFR Part 721, the FCUA stated in its
comments regarding loan-related products, " that FCUs must ensure that members
receive all of the necessary consumer protections provided in applicable laws and
regulations, such as the Truth in Lending Act, 15 U.S.C. 1601 et seq., and Regulation Z,
12 C.F.R. Part 226, so that members make informed choices about whether to purchase these
ancillary products or services." 66 Fed Reg. 40852-40853 (August 6, 2001).

Accordingly, in consideration of the FCUAs authorization of
FCUs making DCCs and DSAs, and existing regulatory and consumer protections, the New
York State Insurance Department will not regulate DCCs or DSAs made by an FCU in
connection with an extension of credit to a customer of the FCU.

New York State banks and savings institutions

On April 2, 2004, the New York Banking Department issued a guidance
letter clarifying the Banking Departments position on DCCs and DSAs with respect to
New York charted "Banking Organizations". These include New York chartered banks
and trusts companies, savings banks, savings and loan associations, and credit unions.

The Banking Department concluded that DCCs and DSAs:

represent products that are incidental to the standard loan
transaction agreements that Banking Organizations have traditionally offered. As such,
DCCs and DSAs are financial instruments that may be offered together with established
banking products. In the Departments view, the underwriting and marketing of such
products by Banking Organizations in connection with the extension of credit are,
therefore, clearly incidental to the business of banking. Accordingly, Banking
Organizations may underwrite and sell DCCs and DSAs in connection with the extension of
credit subject to the Banking Law and any restrictions imposed under the Banking Law.

The Banking Department also concluded that the authority of foreign
banking corporations licensed by the Banking Department was co-extensive with those of
banks and trust companies. Therefore, the Banking Department concluded that branches and
agencies of foreign banking corporations licensed by the Banking Department could also
"engage in underwriting and selling DCCs and DSAs under the Banking Law in connection
with the extension of credit."

The Banking Department stated that Banking Organizations and branches
and agencies of foreign banking corporations licensed by the Banking Department must offer
DCCs and DSAs with adequate and appropriate consumer protections. The guidance letter
states:

Consequently, the Department is of the view that the guidelines
attached to this letter provide the standards needed to ensure that consumers understand
the nature of, and costs and risks associated with, the purchase of these products. These
guidelines, which are mirrored after regulations adopted earlier by the Comptroller of the
Currency, address prohibited practices, refunds, fee payment methods and required
disclosures. Banking Organizations and licensed branches and agencies engaged in the
underwriting and sale to their customers of DCCs and DSAs must follow these guidelines.

In the April 2, 2004 guidance letter, the Banking Department did not
expressly address the question of whether Banking Organizations and branches and agencies
of foreign banking corporations licensed by the Banking Department were exempt from
Insurance Law requirements. However, it noted that " any such entities offering
these products [DCCs and DSAs] should also ensure that they comply with the applicable
provisions, if any, of the New York State Insurance Law and any other law or
regulation."

The definition of "depository institution", as used in GLBA,
encompasses all of the banking entities addressed by the Banking Department in its
guidance letter except for state credit unions, which will be addressed separately below.
For the purposes of the remainder of this discussion, Banking Organizations (other than
credit unions) and branches and agencies of foreign banking corporations licensed by the
Banking Department will be refered to as "state depository institutions".

Since the Banking Department has concluded that state depository
institutions have the power to make DCCs and DSAs, the Departments conclusion in our
April 2, 2002 opinion, that the application of existing laws and regulations relating to
the underwriting of insurance to a national bank underwriting DCCs or DSAs issued by a
national bank would prevent or restrict a national bank from carrying out such activity,
is equally applicable to state depository institutions.

In light of the Banking Departments guidance letter, and in
consideration of the existing regulatory and consumer protections, the New York Insurance
Department will not regulate the sale of DCCs or DSAs sold by a state depository
institution in connection with an extension of credit to a customer of the institution.

State credit unions

Prior to issuing its April 2, 2004 guidance letter, the Banking
Department had determined that state credit unions may engage in various incidental
activities permissible for Federally chartered credit unions, provided that the exercise
of such powers, among other restrictions, were also subject to any restriction imposed
under Section 721 of the NCUAs regulations. (See May 13, 2002 letter from Sara A.
Kelsey, Deputy Superintendent and Counsel). In its guidance letter, the Banking Department
stated that those prior restrictions would apply to state credit unions in addition to the
restrictions provided in the guidance letter that were applicable to Banking
Organizations.

As is the case for Federally charted credit unions, GLBA does not apply
to state chartered credit unions. Recognizing the New York Banking Departments
authorization of the making of DCCs and DSAs by state credit unions, and in consideration
of the existing regulatory and consumer protections, the New York Insurance Department
will not regulate DCCs or DSAs made by a state credit union in connection with an
extension of credit to a customer of the state credit union.

Non-New York state depository institutions

The New York Banking Departments April 2, 2004 guidance letter
addressed only banking entities that are chartered or licensed under New York law.
However, branches of non-New York depository institutions may operate in New York as well.

Whether such an entity has the power to issue DCCs or DSAs is for that
entitys primary regulator to determine. Assuming that the primary regulator has
determined that the entity has such power, and that there are adequate regulatory and
consumer protections similar to those discussed above, the New York Insurance Department
will not regulate DCCs or DSAs made by a non-New York state depository institution in
connection with an extension of credit to a customer of that depository institution.

Gap waivers

A gap waiver is a type of a DCA. Relevant provisions are located in
N.Y. Ins. Law § 1101(b)(3).

For further information one may contact Deputy Superintendent and
General Counsel Audrey M. Samers at the New York City Office.

1 12 CFR 37.2, the regulations of the
Comptroller of the Currency, which are applicable to national banks, defines a DCC and a
DSC as:

(f) Debt cancellation contract means a loan term or contractual
arrangement modifying loan terms under which a bank agrees to cancel all or part of a
customer's obligation to repay an extension repay an extension of credit from that bank
upon the occurrence of a specified event. The agreement may be separate from or a part of
other loan documents.

(g) Debt suspension agreement means a loan term or contractual
arrangement modifying loan terms under which a bank agrees to suspend all or part of a
customer's obligation to repay an extension of credit from that bank upon the occurrence
of a specified event. The agreement may be separate from or a part of other loan
documents. The term debt suspension agreement does not include loan payment deferral
arrangements in which the triggering event is the borrower's unilateral election to defer
repayment, or the bank's unilateral decision to allow a deferral of repayment.

2 12 U.S.C. 1813 provides, in pertinent
part:

a) Definitions of bank and related terms.
(1) Bank. The term "bank"
(A) means any national bank, State bank, and District bank, and any Federal branch and
insured branch;
(2) State bank. The term "State bank" means any bank, banking association, trust
company, savings bank, industrial bank (or similar depository institution which the Board
of Directors finds to be operating substantially in the same manner as an industrial
bank), or other banking institution which
(A) is engaged in the business of receiving deposits, other than trust funds (as defined
in this section); and
(B) is incorporated under the laws of any State or which is operating under the Code of
Law for the District of Columbia (except a national bank
(b) Definition of savings associations and related terms.
(1) Savings association. The term "savings association" means
(A) any Federal savings association;
(B) any State savings association; and
(C) any corporation (other than a bank) that the Board of Directors and the Director of
the Office of Thrift Supervision jointly determine to be operating in substantially the
same manner as a savings association .
(c) Definitions relating to depository institutions.
(1) Depository institution. The term "depository institution" means any bank or
savings association
(4) Federal depository institution. The term "Federal depository institution"
means any national bank, any Federal savings association, and any Federal branch.
(5) State depository institution. The term "State depository institution" means
any State bank, any State savings association, and any insured branch which is not a
Federal branch.